La Jolla Capital Corporation and Harold B. Gallison, Jr.
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 41755 / August 18, 1999
Admin. Proc. File No. 3-9557
In the Matter of the Application of
LA JOLLA CAPITAL CORPORATION
c/o Irving M. Einhorn, Esq.
11900 Olympic Boulevard, Suite 510
Los Angeles, California 90064-1151
and
HAROLD BAILEY GALLISON, JR.
For Review of Action Taken by the
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY ACTION Violation of Conduct Rules
Failure to Supervise
NASD member firm and its president failed to maintain supervisory procedures and to supervise appropriately registered representatives in distant branch office who induced purchases of highly speculative stock by making unfounded claims about merits of investment and predicting rising stock prices without disclosing company's questionable financial situation. Held, association's findings of violation and sanctions it imposed sustained.
APPEARANCES:
Irving M. Einhorn, for La Jolla Capital Corporation and Harold Bailey Gallison, Jr.
Alden S. Adkins, Susan L. Beesley, and Jeffrey S. Davis, for NASD Regulation, Inc.
Appeal filed:
March 27, 1998
Last brief received:
July 10, 1998
I.
La Jolla Capital Corporation ("La Jolla"), a member firm of the National Association of Securities Dealers, Inc. ("NASD"), and Harold B. Gallison, Jr., who is La Jolla's President and Supervisor of Trading and who was formerly also its Chief Compliance Officer, appeal from NASD disciplinary action. The NASD found that La Jolla and Gallison violated NASD Rules 2110 and 3010 by failing to establish, maintain, and enforce supervisory procedures designed to achieve compliance with the NASD's rules. 1 The NASD censured La Jolla and Gallison and fined them $100,000 each. It barred Gallison from associating with any member in a principal or supervisory capacity and required him to requalify by examination in any other capacity in which he wished to become associated. It required La Jolla to retain an independent consultant to audit, alter, and monitor its compliance program for two years. 2 We base our findings on an independent review of the record.
II.
Following an investigation of trading in the stock of Jutland Enterprises, Inc. ("Jutland"), the NASD's Market Surveillance Committee (subsequently the Market Regulation Committee, or "MRC") issued a complaint against La Jolla; Gallison; Mark Furman, a branch manager; Michael Garber and Alex Gincherman, two La Jolla registered representatives; and others.3 The complaint alleged, and the MRC found, that Furman, Garber, and Gincherman violated Conduct Rules 2110 and 2120 by making material misrepresentations in the purchase and sale of Jutland stock, and that La Jolla and Gallison violated Conduct Rules 2110 and 3010 by failing to establish, maintain, and enforce an adequate supervisory system with respect to the registered personnel in La Jolla's New York office.4 On appeal, the National Adjudicatory Council ("NAC") affirmed the decision of the MRC. The appeal by Gallison and La Jolla followed.
There is no dispute concerning the material facts in this proceeding. In their brief to us Gallison and La Jolla have, with two exceptions not material here, repeated verbatim the recitation of the facts set forth in the NAC's opinion.
Applicants. Gallison entered the securities industry in 1982 and became a general securities principal in 1989. In August 1992, he joined La Jolla, where he served as President and Supervisor of Trading during the relevant period. He also served as La Jolla's Chief Compliance Officer for all but a few weeks of that period.
La Jolla became an NASD member in May 1990. Its main office is in San Diego, California. By June 1993, it had between six and eight branch offices, each of which it had designated an office of supervisory jurisdiction ("OSJ"). 5 A general securities principal was responsible for overseeing the day-to-day operations of each OSJ, including the conduct of the registered sales personnel there. Gallison supervised the OSJ managers by reviewing trade blotters, customer account statements, and trade tickets, but he considered each OSJ manager to be the "owner" of the OSJ he or she managed and to be the "front line" of the supervisory program.
In late October 1993, La Jolla opened a branch office in New York. Between its opening and February 1994, when it closed, members of its staff, including its branch manager, Mark Furman, engaged in serious sales practice violations in connection with the stock of Jutland.
Hiring Furman. On September 7, 1993, La Jolla hired Furman. Furman had become a general securities representative just a year earlier, in September 1992. 6 When he joined La Jolla, he was preparing to take the Series 24 examination that would qualify him as a general securities principal.
During September and October 1993, Furman studied for the exam and became familiar with the operations of the San Diego office. Furman spent time in each of La Jolla's departments, including trading and compliance. Although Furman and Gallison frequently discussed what would be involved in running a branch office, including various problems that could arise, La Jolla provided no formal training in supervision for branch managers. On October 27, 1993, Furman passed the Series 24 examination. He was immediately registered as a general securities principal and, a few days later, he was named as the first branch manager of La Jolla's newly-opened New York City office.
Gallison assigned Furman responsibility for supervising the four registered representatives in the New York office. All four were relatively new to the securities industry, with at most two years of experience after licensing. Furman never held any training sessions or compliance meetings in the New York office.
Activities in the New York Office. During the four months that the New York office was open, Furman and two of the registered representatives he was responsible for supervising, Michael Garber and Alex Gincherman, engaged in serious misconduct with respect to sales of Jutland stock. Jutland was incorporated in 1988 "for the purpose of seeking and acquiring an interest in a business opportunity with a long-term growth potential." It developed a bakery cafe concept, "Cafe 2000," but only briefly had an ownership interest in a bakery. 7 It acquired the "rights to" a "sandwich shop system" that had two operational stores, but it never acquired or opened any additional stores. The company stated in its Form 10-Q for the six months ending June 30, 1993 that Jutland engaged primarily "in identifying possible acquisition targets" that it could acquire with Jutland common stock and "in identifying transactions which would generate reliable cash flow and enhance its financial stability." The company had revenues of $2,500 for the six-month period, a net loss from operating activities of $103,620, and a decrease in working capital of $262,220.8 Jutland never reported an operating profit.
Furman, Gincherman, and Garber enthusiastically recommended the purchase of Jutland stock to at least seven La Jolla customers. They made unfounded claims about the merits of the investment and predicted rising stock prices without disclosing Jutland's financial situation. Furman told one customer that Jutland was "an opportunity of a lifetime," and that Jutland would have "a coffee shop on every corner" and "would be in competition with Starbucks." Garber told a customer that Jutland was a "growing, expanding company"; when the stock lost more than half its value in less than a month, Garber told the customer to hold the stock because it would go back up. Gincherman told a customer that Jutland "could be another Checkers." 9 It is undisputed that Furman's, Gincherman's, and Garber's representations about Jutland were knowingly false and that, in making them, the representatives violated NASD Conduct Rule 2120.10
La Jolla's Supervisory Structure. Once the New York office was open, Gallison reviewed the trade blotters and tickets from that office on a daily basis, as he did for all of La Jolla's OSJs. Beyond that, he did nothing to supervise either Furman or the registered representatives in the New York office: for example, he did not visit that office or hold compliance meetings with any of its personnel. As the branch manager, Furman was given an operations checklist to ensure that the branch office had been set up properly -- for example, that the office maintained due diligence, correspondence, and customer complaint files. Gallison, however, did not follow up to make sure Furman completed the items on the checklist.
At about the same time that Furman became branch manager of the New York office, Gallison hired Greg Mehlmann as "national franchise compliance officer." Gallison claims that he delegated supervision over the New York office to Mehlmann.11 La Jolla, however, amended its compliance manual to delegate to Mehlmann the primary responsibility for supervising the OSJs only in February 1994 -- near the time that the New York office closed. Gallison does not identify what directions he gave to Mehlmann about the New York office. The record, moreover, does not reflect that Mehlmann undertook any particular supervisory activities with respect to the New York office.12
Gallison's Knowledge of Jutland. Gallison was familiar with Jutland. La Jolla made a market in Jutland stock from December 1992 until early 1994.13 Gallison was La Jolla's Supervisor of Trading during this period. Gallison knew that Jutland was "a start-up company with . . . marginal revenue at best [and] little or no assets" and that its stock was "very, very speculative." He also knew that Jutland's market capitalization, which reached a high of $68 million in January 1994, was questionable in view of its financial situation.
Gallison and La Jolla also had a special arrangement that provided for La Jolla to receive Jutland stock. On January 6, 1993, Gallison signed an Investment Banking Agreement with Ventana Consultants ("Ventana"). La Jolla agreed to provide Ventana with investment banking and advisory services in exchange for free Jutland stock. Between January 6, 1993 and January 22, 1994, La Jolla received three transfers of free stock (totalling 7,000 shares) from the account of Donald Oehmke, Ventana's President and a La Jolla client.
Between late October 1993 and early February 1994, none of La Jolla's branch offices other than the New York office sold Jutland shares to retail customers. The trade blotters and tickets that Gallison reviewed revealed the retail sales of Jutland in the New York office. Although Gallison knew of Jutland's speculative nature as a result of his market making activities, he did nothing to investigate the activity in Jutland or to find out what customers were being told about the stock to induce their purchases.
III.
NASD Conduct Rule 3010(a) requires NASD members to "establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the Rules of [the NASD]." The Rule specifically requires, among other things, that a member "establish, maintain, and enforce written procedures to supervise the types of business in which it engages and to supervise the activities of registered representatives and associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with the applicable Rules of [the] Association." 14 Whether a particular supervisory system or set of written procedures is in fact "reasonably designed to achieve compliance" depends on the facts and circumstances of each case.15 We agree with the NASD that La Jolla's supervisory system failed to meet this standard.
A. NASD Rule 3010 requires NASD members to establish and maintain written procedures "reasonably designed to achieve compliance" with applicable laws and rules. La Jolla's compliance manual, which set forth the firm's procedures, fell far short of this standard. The manual contained several lists of prohibited activities, but it did not explain what procedures those persons responsible for supervision should employ to detect and prevent such activities. For example, the manual identified "[u]se [of] overly-optimistic forecasts, or recommending purchases or sales without a reasonable basis for such recommendations," as prohibited practices, but it did not set forth any specific procedures that the branch manager should use to detect or prevent those practices.16
Moreover, the manual did not adequately set forth a supervisory chain of command, nor did it describe the division of duties and responsibilities between Gallison and Mehlmann with respect to the New York office, as required by Rule 3010(b)(2). The "General Procedures" section of the manual cross-referenced a separate policy that supposedly set forth specific definitions and supervisory procedures regarding branch offices and OSJ's, but the manual did not include that policy.17 We conclude that La Jolla's written procedures did not meet the Rule 3010(b) standard.
B. Applicants did not have an adequate supervisory system for La Jolla's New York office. That branch office was located far away from the firm's headquarters, and it was staffed by personnel with little experience: Furman, the branch office manager, was a brand-new principal; none of the registered representatives that he was to supervise had more than two years of experience in the securities industry and Furman gave them no training; and all the staff had only recently been hired by the firm. We have often stressed "the obvious need to keep [a] new office with . . . untried personnel under close surveillance."18 That need is especially great when such an office is at a substantial distance from supervisory or compliance personnel.19
Despite this need for close supervision, Gallison essentially left the branch manager, Furman, to supervise the office's sales practices on his own. Although Gallison continued to review tickets and blotters, he had no system to monitor Furman's performance. For example, Furman, as part of his supervisory obligations, was responsible for completing an operations checklist. Gallison, however, failed to ensure that Furman had completed the steps on this list. Nor does the record show that Gallison took any other steps to monitor Furman's performance as manager of the New York office.
Gallison's supervision was inadequate. Although the branch manager may serve as "the first line of compliance," 20 a supervisory system cannot rely solely on supervision by branch managers; it must provide enough checks to ensure that any supervisory responsibility delegated to branch managers is being diligently exercised.21 La Jolla's system lacked such checks.
La Jolla and Gallison argue that La Jolla's system of supervision in fact did not rely exclusively on branch managers. They explain that Gallison hired Mehlmann as national compliance officer and assigned Mehlmann to review all branch offices twice a year. But the compliance manual does not show that Mehlmann was designated as a supervisor over the New York office until February 1994, several months after that office opened.22 And applicants do not identify any ways in which Mehlmann focused supervision on the newly-opened New York office.23
Moreover, assuming that Gallison had delegated supervisory authority over the New York office to Mehlmann, he also needed to monitor Mehlmann's performance. As we have repeatedly held:
[i]t is not sufficient for the person with overarching supervisory responsibilities to delegate supervisory responsibility to a subordinate, even a capable one, and then simply wash his hands of the matter until a problem is brought to his attention. . . . Implicit is the additional duty to follow-up and review that delegated authority to ensure that it is being properly exercised.24
Mehlmann was new to the role of national compliance officer. Gallison should have followed up to make certain Mehlmann was doing his job properly, especially in the first few months after he assumed the new responsibilities.
La Jolla and Gallison argue that they satisfied the supervisory requirements by instructing Mehlmann to inspect La Jolla's branch offices twice a year, rather than only once as NASD Rule 3010(c) requires. They argue that this increased frequency of inspection compensates for the geographic remoteness of the office and the lack of experience of its personnel. We disagree. Rule 3010(c) states that a review of each office shall occur "at least annually." Assuming that Mehlmann had received this direction from applicants, under these circumstances -- where an inexperienced branch manager was put in charge of inexperienced staff, in a newly-opened office far away from headquarters -- simply telling Mehlmann to inspect the branch offices more often was not enough. In any event, it is not clear that the twice-a-year inspection policy was in effect at La Jolla at the time in question, since the compliance manual specified only annual inspections.25
La Jolla and Gallison further argue that their failure to inspect the New York office during the few months it was open was reasonable. They assert that it was reasonable to wait to make an inspection until the office had been conducting business long enough to accumulate a body of records to review. Again, under the circumstances here, we disagree. The New York office was staffed by inexperienced personnel, supervised by an inexperienced individual with limited training, and geographically removed from La Jolla's main office. An inspection could have assessed the familiarity of branch office personnel with the firm's procedures and considered whether appropriate supervisory procedures were in place, or reviewed Furman's performance of the procedures required by La Jolla's checklist. Additionally, such an inspection would have helped to emphasize to branch office personnel that the firm took compliance seriously.
C. The inadequacies of applicants' supervision are also demonstrated by their failure to respond to the red flags raised by the New York office's trading in Jutland stock. Once indications of irregularity arise, supervisors must respond appropriately. 26 Gallison was La Jolla's Supervisor of Trading when the firm was making a market in Jutland. He admitted that he knew that Jutland had marginal revenues at best, and few if any assets. He also knew that its stock was highly speculative and (although he made a market in the security) that its market valuation made no sense in light of the company's financial condition.27 Based on his review of trade tickets and blotters, Gallison must have known that the New York office, and no other branch office, was selling Jutland stock. Yet these circumstances called forth no response.28
Faced with these circumstances, La Jolla should have taken action. Gallison should have taken steps to learn why seven La Jolla customers in the New York office had begun buying Jutland stock. At a minimum, he should have spoken to Furman and received a description of the circumstances of the transactions and of the steps Furman was taking to ensure that any recommendations were truthful and appropriate. Furman's response might well have called for further inquiry. Had Gallison taken these rudimentary supervisory steps, he might have brought the improper sales activity to an end more quickly, thus limiting customer losses.
IV.
As noted above, the NASD fined Gallison and La Jolla $100,000 each. It also barred Gallison from associating with any member in a principal or supervisory capacity; required him to requalify by examination in any other capacity; required La Jolla to retain an independent consultant to audit, alter, and monitor its compliance program; and required La Jolla and Gallison to pay hearing costs.
We review sanctions imposed by the NASD to determine whether those sanctions are excessive or oppressive, or whether they impose an unnecessary or inappropriate burden on competition.29 The failure of Gallison and La Jolla to supervise the New York office effectively was a very serious matter. As we have previously stated, " '[t]he responsibility of broker-dealers to supervise their employees by means of effective, established procedures is a critical component in the federal investor protection scheme regulating the securities markets.' " 30 The failure to supervise the New York office caused harm to investors.
This is not the first time that Gallison and La Jolla have been sanctioned for failure to supervise. In November 1993, the State of Colorado revoked Gallison's registration with a right to reapply after five years for failing to supervise a Denver, Colorado branch office. In January 1994, La Jolla was sanctioned by the State of Illinois, pursuant to a consent order, for failing reasonably to supervise the activities of at least one salesperson. In August 1995, the State of Nevada sanctioned La Jolla and Gallison, also pursuant to a consent order, in part for failure to supervise.31
The NASD Sanction Guidelines suggest that in egregious cases of supervision violations a supervisory or principal bar should be considered, as well a requalification requirement.32The Guidelines also suggest individual fines of up to $25,000 against the responsible principal and the firm in routine cases, with substantially higher penalties where there is a pattern of multiple violations.33 We have previously recognized that the Guidelines "do not specify required sanctions but merely provide a 'starting point' in the determination of remedial sanctions."34
Here, the supervisory system was grossly inadequate, and Gallison and La Jolla have a history of supervisory and other violations. The bar imposed by the NASD is consistent with the Guidelines' recommendation for egregious cases, and the fines are justifiably higher than the recommended minimum. We do not find that these sanctions are excessive or oppressive, and we therefore sustain them.
An appropriate order will issue.35
By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, CAREY and UNGER).
Jonathan G. Katz
Secretary
Commissioner HUNT concurs in the result but dissents as to the fines imposed upon applicants, which he considers too high.
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 41755 / August 18, 1999
Admin. Proc. File No. 3-9557
In the Matter of the Application of
LA JOLLA CAPITAL CORPORATION
c/o Irving M. Einhorn, Esq.
11900 Olympic Boulevard, Suite 510
Los Angeles, California 90064-1151
and
HAROLD BAILEY GALLISON, JR.
For Review of Action Taken by the
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION
On the basis of the Commission's opinion issued this day, it is
ORDERED that the disciplinary action taken by the National Association of Securities Dealers, Inc. against La Jolla Capital Corporation and Harold Bailey Gallison, Jr., and the Association's assessment of costs, be, and they hereby are, sustained.
By the Commission.
Jonathan G. Katz
Secretary
FOOTNOTES
-[1]- Rule 2110 requires members to observe "high standards of commercial honor and just and equitable principles of trade" in conducting their business. Rule 3010 requires NASD members to establish, maintain, and enforce a supervisory system that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable NASD rules. Rules 2110 and 3010 were formerly Article III, 1 and Article III, 27 of the NASD Rules of Fair Practice.
-[2]- The NASD also assessed costs.
-[3]- Seven of the twelve respondents named in the complaint were alleged to have been involved in sales of Jutland through entities other than La Jolla.
-[4]- Neither Furman nor Gincherman answered the complaint. The MRC deemed their failure to answer an admission of each of the allegations of the complaint. The MRC also found, based on the evidence presented at the hearing, that there was sufficient evidence to support findings against Furman and Gincherman. Garber did not appeal the NASD's determination. Our findings here with respect to Furman, Gincherman, and Garber are made solely for the purpose of this proceeding.
-[5]- "Office of supervisory jurisdiction" is defined as any office of an NASD member at which, among other things, the "review and endorsement of customer orders" takes place. NASD Rule 3010(g)(1)(E) (formerly Article III, 27(g)(1)(v) of the Rules of Fair Practice).
-[6]- Furman had entered the securities industry in 1988 as an investment company and variable contracts product representative.
-[7]- The NASD found that Jutland never opened any bakeries. In their brief, Gallison and La Jolla accepted this finding for purposes of this appeal. We note, however, that Jutland's Form 10-K for the year ended December 31, 1992 shows that Jutland was involved in a partnership that operated a Cafe 2000 store for nine months in 1992.
-[8]- Jutland's Form 10-Q for the quarter ending June 30, 1993 was the last quarterly report filed before La Jolla's New York office opened. The Form 10-Q for the nine months ending September 30, 1993 showed revenues of $14,390 for the nine-month period, a net loss of $153,636, and a decrease in working capital of $50,357.
-[9]- Gincherman was apparently referring to Checkers Drive-In Restaurants, Inc., a Florida company that, as of September 30, 1993, had an ownership interest in 192 company-operated restaurants, with an 142 additional restaurants operated by franchisees.
-[10]- Rule 2120 provides, in relevant part, that "[n]o member shall . . . induce the purchase . . . of any security by means of any manipulative, deceptive or other fraudulent device or contrivance."
The violations by Furman, Gincherman, and Garber resulted in customer losses of more than $29,500, excluding settlements made by La Jolla. The NASD found that customer losses exceeded $50,000, and in their brief, Gallison and La Jolla accepted that figure for purposes of this appeal. We note, however, that some customer losses about which evidence was presented at the hearing were incurred outside the review period, or were due in part to actions of representatives other than Furman, Garber, and Gincherman. In any event, customer losses were substantial.
-[11]- Mehlmann did not testify before the NASD.
-[12]- Mehlmann dropped by the New York office on an unscheduled visit late one afternoon in December 1993, but by the time he arrived everyone had left for the day.
-[13]- La Jolla ceased market making activities in Jutland for several months in the spring of 1993, then started again.
-[14]- Rule 3010(a)(1), (b)(1).
-[15]- Christopher J. Benz, 52 S.E.C. 1280, 1284 & n.19 (1997) (citing cases), aff'd, 168 F.3d 478 (3d Cir. 1998) (Table).
-[16]- See Gary E. Bryant, 51 S.E.C. 463, 471 (1993) (criticizing firm for adopting compliance procedures that "provided nothing more than a list of things that the firm and its representatives should not do" and for failing to establish specific controls or supervisory procedures to deter or detect violative conduct); see also Steven P. Sanders, Securities Exchange Act Rel. No. 40600 (Oct. 26, 1998), 68 SEC Docket 982, 993-94 (finding firm's procedures regarding pricing inadequate: compliance manual correctly stated rule about how to determine prevailing market price for a security where no independent market exists, but gave no guidance about how to determine whether independent market exists).
-[17]- Gallison offered to obtain a copy of the referenced policy and provide it to the MRC hearing panel, but he did not do so.
-[18]- SECO Securities, Inc., 49 S.E.C. 873, 876 (1988); see also Consolidated Investment Services, Inc., 52 S.E.C. 582, 586 (1996) (recognizing "obvious need" to keep untried personnel under close surveillance); Conrad C. Lysiak, 51 S.E.C. 841, 845 (1993) (quoting SECO Securities), aff'd, 47 F.3d 1175 (9th Cir. 1995) (Table).
-[19]- Consolidated Investment Services, Inc., 52 S.E.C. at 586 (need to keep untried personnel under close surveillance is particularly obvious as applied to "those who work a substantial distance away from any supervisory or compliance personnel"); see also Shearson, Hamill & Co., 42 S.E.C. 811, 843 (1965) ("The need for central control increases, not decreases, as branch offices become more numerous, dispersed and distant.").
-[20]- Shearson Lehman Brothers, Inc., Securities Exchange Act Rel. No. 23640 (Sept. 24, 1986), 36 SEC Docket 1075, 1083 (settled case).
-[21]- Rita H. Malm, 52 S.E.C. 64, 70 & n.18 (1994) (citing cases).
-[22]- Cf. Steven P. Sanders, 68 SEC Docket at 997-98 & n.31.
-[23]- Gallison described Mehlmann's duties generally as investigating problems with managers or registered representatives in La Jolla's branch offices, inspecting branch offices and writing audit reports, reviewing trading tickets from branch offices, and preparing inserts for La Jolla's compliance manual.
-[24]- Castle Securities Corp., Securities Exchange Act Rel. No. 39523 (Jan. 7, 1998), 66 SEC Docket 796, 802, quoting Rita H. Malm, 52 S.E.C. at 73, quoting Stuart K. Patrick, 51 S.E.C. 419, 422 (1993) (footnote omitted), aff'd, 19 F.3d 66 (2d Cir. 1994).
-[25]- Although Gallison testified that Mehlmann was to visit each branch office twice a year, the manual stated in two places that examinations were to be conducted "at least annually."
-[26]- See Michael H. Hume, 52 S.E.C. 243, 248 (1995); Rita H. Malm, 52 S.E.C. at 70; Louis R. Trujillo, 49 S.E.C. 1106, 1110 (1989).
-[27]- Gallison is not charged with any other violation with respect to La Jolla's activities in Jutland.
-[28]- We reject the argument that the Jutland trading at the New York office was not significant enough to constitute a red flag requiring a response because the 13 transactions over the four-month period that the New York office was open "hardly stood out." In view of Gallison's and La Jolla's involvement with Jutland, both through the firm's market making and through the receipt of Jutland stock from Ventana, Gallison should have noticed the trading and taken appropriate supervisory action.
-[29]- See Section 19(e)(2) of the Exchange Act, 15 U.S.C. 78s(e)(2).
-[30]- SECO Securities, Inc., 49 S.E.C. at 876 (quoting Smith Barney, Harris Upham & Co., Securities Exchange Act Rel. No. 21813 (March 5, 1985), 32 SEC Docket 999, 1010 (settled case)).
-[31]- The Nevada consent order was also based upon allegations that La Jolla sold unregistered securities.
Applicants do not dispute the disciplinary history reported in the record. In addition to the incidents noted above, the NASD found that La Jolla had entered into consent orders with the States of New Hampshire, Colorado, and South Carolina for conduct unrelated to supervision. Moreover, it found that in separate actions Gallison had been censured and ordered to disgorge commissions by the NASD and ordered to cease and desist by the Commission for conduct unrelated to supervision. See Robin Rushing, Initial Decision Rel. No. 85 (Jan. 26, 1996) (finding that Gallison aided and abetted and caused a violation of Section 15(c)(2) of the Exchange Act and Rule 15c2-11 thereunder and ordering him to cease and desist from future violations), 61 SEC Docket 753, declared final, Securities Exchange Act Rel. No. 36910 (Feb. 29, 1996), 61 SEC Docket 1128. In reviewing respondents' disciplinary histories, we routinely consider orders in both settled and adjudicated proceedings. See, e.g., Walter Capital Corp., 50 S.E.C. 176, 179-80 (1989); Pagel, Inc., 48 S.E.C. 223, 232 (1985), aff'd, 803 F.2d 942 (8th Cir. 1986). In September 1997, the NASD's District Business Committee for District No. 2 found that La Jolla and Gallison, among others, violated NASD Conduct Rules 2110 and 3010, in part by failing to establish, maintain, and enforce adequate written supervisory procedures. Neither the NASD nor we considered it in imposing sanctions.
-[32]- NASD Sanction Guidelines at 44 (1993).
-[33]- Id.
-[34]- Hattier, Sanford & Reynoir, Securities Exchange Act Rel. No. 39543 (Jan. 13, 1998), 66 SEC Docket 922, 930 n.17 (quoting Peter C. Bucchieri, 52 S.E.C. 800, 806 (1996) (citation omitted)).
-[35]- We have considered all the arguments advanced in the briefs. They are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed in this opinion